The global financial crisis put a dent in corporate dealmaking last year, and activity will likely be subdued this year with many deals being “mergers of necessity,” analysts said.
Global merger and acquisition (M&A) volume fell 28 percent last year to a total value of US$3.33 trillion following a record year in 2007, the research firm Dealogic said.
The fourth quarter was especially weak, with mergers down 36 percent from the same period in 2007 to US$651 billion, the firm said in its report for last year.
Moreover, a record 1,362 planned deals were scrapped last year with a total value of US$923 billion, Dealogic said. BHP Billiton’s withdrawn bid for Rio Tinto, at US$147.8 billion, was the largest ever deal to be withdrawn.
A separate report by PricewaterhouseCoopers (PwC) pointed out that financing has become a problem for big corporate deals because of the global credit crisis.
PwC said that in the first 11 months of last year the number of mergers and acquisitions worldwide was 8,190, a 22 percent drop from the same period in 2007.
“There’s just no credit out there,” PwC partner Greg Peterson said.
Potential acquirers “just can’t finance anything,” he said.
Even if firms seek to use their stock for an acquisition, Peterson said, “the value of the shares has dropped substantially and they would have to use so much of their stock in a takeover.”
Potential takeover targets were also wary, he said: “They don’t want to take stock” instead of cash, limiting the likelihood of deals.
At the start of this year, the few mergers being worked on are deals aimed at helping distressed companies survive, PwC notes.
“Troubled companies will look to align with larger, stronger players in order to survive, creating the perfect storm for mergers of necessity,” PwC partner Robert Filek said.
Even venture capital deals, which often fund start-ups and technology deals without borrowed funds, have been hurting as investors step back in the face of market turbulence.
The National Venture Capital Association cited 260 mergers and acquisitions last year, the first year since 2003 when there were fewer than 300 venture-backed acquisitions.
The group cited six venture-backed initial public offerings (IPOs) of shares in the year, with a value of US$470 million, compared with 86 IPOs in 2007 with a combined value of over US$10 billion.
“The IPO market virtually shut down in the second quarter,” said Emily Mendell, vice president of the NVCA.
“The acquisition market is impacted by how healthy the public markets are, and we began to see problems in the third quarter,” she said.
“We’re hoping the market will reopen in late 2009 or early 2010,” Mendell said. “The market needs to stabilize, investors need to regain some confidence. It going to be a year of survival and those who do survive will do very well.”
Private equity deals, which may use borrowed funds, also faced troubles.
Dealogic said private equity deals fell 71 percent last year to a total value of US$658 billion, with no deals worth more than US$5 billion. The fourth quarter was even worse, with an 84 percent drop.
Canceled private equity deals amounted to US$132.3 billion, including the whopping US$48.5 billion acquisition of Canada’s BCE Enterprises, which was scrapped last month.
Some of the gap was filled by sovereign wealth funds, which accounted for US$56.7 billion deals last year, slightly above 2007 levels. The largest deal was the US$12.5 billion investment in Citigroup by a group that included Singapore’s and Kuwait’s sovereign funds.
There is little to suggest an immediate return to the heady period of dealmaking, PwC’s Peterson said.
“The dealmakers believe we may not have hit the bottom, and if unemployment continues to go up and business transactions continue to go down it may be wise to wait,” he said.
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